In a new study, international bank Credit Suisse says that the concerns over the overheating of the markets are over-rated, because of the strong macro economic fundamentals of the Indian economy. In its April forecast, Sailesh.Jha, the author of the study argues that India's current account deficit is sustainable and not a constraint on growth.

According the report, the most recent trade data suggest that the rapid deterioration in the trade deficit since H1 2004 is stabilising and portfolio flows only account for 35 per cent of total capital flows and one of the main determinants is GDP growth. The bank expects the balance of payments to improve in FY06 / 07 and has revised its dollar : ruppee forecast to 43-43.5 from 44.5 by end-2006.

The study says, "We expect future current account deficit data points to be revised down due to problems in the timely recording of export and import payments." IT points out that the Q2 FY05 / 06 current account deficit was revised down to $5.1 billion from $7.7 billion, while the Q1 FY05 / 06 current account deficit was revised down to $4.6 billion from $5.3 billion.

The Q3 FY05 / 06 current account deficit was around $3.9 billion. The main revision in the Q1 FY05 / 06 current account balance was higher exports revenues compared to the initial estimate. In Q2 FY05 / 06, the current account deficit was revised down due to stronger exports and higher tourism-related inflows compared to the initial estimate.

"The reason why the export data were revised up was that the other capital line item in the capital accounts refers to export and import payments that have not been accounted for in the trade account," the study states. "In other words, the other capital line item is like an errors and omission line item. That is the reason why other capital and the current account deficit are positively related."

The report also goes on to forecast that the Reserve Bank of India would be able to manage liquidity conditions over the next three to six months to prevent a credit crunch. This is despite credit growth of over 30 per cent year-on-year compared to 18 per cent Y-o-Y deposit growth. Fiscal and monetary policy tools on the part of the state governments and central bank are available to inject liquidity in the next three to six months.

It forecasts forecast that the 2005 / 06 GDP would grow by 8.1 per cent and 8.5 per cent in FY06 / 07 versus the consensus forecasts of 7.5 per cent and 7.3 per cent, respectively. "Our view on India is more optimistic than the market's in large part because we do not see the constraints on growth many in the market fear."